Mine bankruptcy 'aftershock' hits local companies

Like the aftershocks following an earthquake, repercussions of a 2008 Emery County mine bankruptcy are sending financial tremors through scores of Castle Country businesses.

Two sources have told the Sun Advocate that 120 local firms are affected by the failure of C. W. Mining Co., owner of the Co-Op Mining Beaver Canyon Mine. CWM was forced into involuntary bankruptcy in January 2008.

This is not a case of the vendors going unpaid because of the bankruptcy, however. It is a case of having to refund all the money they received from CWM since October 2007.

Attorneys for the bankruptcy trustee early last month delivered letters to local companies demanding repayment of money they received since 90 days before the bankruptcy filing. The demand letters are entirely legal, authorized by the U.S. Bankruptcy Code. The law gives the trustee the power and the responsibility to collect money already paid to vendors and put it in the debtor's account for distribution to all creditors. The provisions of the code are intended to prevent "preferential" payments that might favor certain vendors or lenders over others. (These are sections 547, 548 and 549.)

However, for businesses that thought they had been fairly compensated for equipment and services they provided for CWM more than two years ago, the demand letters are a nightmare.

"When I first heard about this law, I thought I must be hearing wrong. This just can't be," commented one of the affected vendors. "But every lawyer in town will tell you it's the law and there's no way out," he added. He explained that the situation is like making his company pay twice for the same thing, first to buy the original equipment and make payroll, then to refund the reimbursements received.

"This is going to hurt, but we'll make it. I'm not sure about Christmas bonuses this year, though," said another vendor.

The cause of last month's cascade of demand letters was years in the making. A Federal Court of Appeals summary shows that CWM ran into a series of problems that began just one month after a moment of triumph in 2003. In September, the company signed a contract to deliver 1.5 million tons a year for three years to Aquila, Inc., a Midwest electric utility. The ink was barely dry by October, when about half of the mine's 120 workers walked off the job in a labor dispute.

At the same time, the No. 1 mine was experiencing a lot of roof falls. That led the Mine Safety and Health Administration to order a halt to operations in January 2004. Mines 3 and 4 might have picked up the slack, but geology prevented that. Miners encountered "hot spots" where coal had reached unsafe temperatures, and mud in other sections compounded the problems.

Co-Op was unable to deliver fully on the agreement. Aquila (now Black Hills Energy) accepted partial deliveries, but had to shop on the open market to make up the deficit. The utility had to pay a higher price for the coal it got, and also had to buy emission credits because the sulfur content of the make-up coal was higher than Co-Op's.

By April 2005, CWM said it was going to cancel the contract. Aquila sued in Salt Lake Federal District Court to recover the $24 million in extra coal expenses it incurred. It won a judgment against CWM, which was later upheld by the Appeals Court in November 2008. The district court ruled that it was not the strike but the geology that caused the production problem, and that CWM did not sufficiently advise Aquila of the situation.

The U.S. Bankruptcy Court at Salt Lake City in July allowed the trustee to sell the mine to an out-of-state buyer for $15 million in cash. The buyer is Rhino Energy, LLC, which operates mines in Colorado, Kentucky, West Virginia and Ohio. Rhino produced 5 million tons in 2009, according to court documents.